Why IMF needs to change its approach to lending

Martins Ifijeh in Washington DC

 

In Summary

By last year, Argentina’s fiscal and current-account deficits exceeded 5% of GDP. In the ensuing economic and financial crisis, public debt ballooned to nearly 90% of GDP, capital flight caused the
peso’s value to collapse, and inflation soared.

By Jayati Ghosh

The process of selecting the International Monetary Fund’s next managing director must change. In particular, the tradition of choosing a European for the post – based on an unfair and anachronistic “gentlemen’s agreement” reached with the United States when the institution was established 75 years ago – needs to be discarded. But even more important, the IMF’s longstanding approach to lending should be transformed.

The Fund has a long history of policy mistakes. Yet, as Christine Lagarde’s just-completed tenure showed, it has learned little from them. Consider the case of Argentina. In mid-2018, the IMF agreed to provide the country with a heavily frontloaded three-year loan worth nearly $57 billion – the largest in the institution’s history – following a series of reckless decisions by President Mauricio Macri.

One such decision, made soon after he took office in 2015, was to strike a deal with the holdout creditors who were still fighting in US courts to be repaid in full, following Argentina’s 2002 debt default and subsequent restructuring. Another was Macri’s subsequent borrowing spree, which caused public debt – mostly denominated in dollars – to swell by more than one-third, to $321 billion in 2017.

By last year, Argentina’s fiscal and current-account deficits exceeded 5% of GDP. In the ensuing economic and financial crisis, public debt ballooned to nearly 90% of GDP, capital flight caused the peso’s value to collapse, and inflation soared. So, under pressure from US President Donald Trump (who had business ties with Macri), the IMF stepped in – with Lagarde’s active support.

The loan may have been unprecedented in size, but it had all the familiar characteristics of past IMF financing programs. In exchange for the cash, Argentina was to implement massive budget cuts, in order to balance its primary budget in 2019 and significantly reduce its external deficit. Argentina complied – and the economy steadily deteriorated.

Today, inflation is running at over 55%, the poverty rate has surpassed 30%, and output and employment are shrinking. Argentina is nowhere near the IMF’s targets for investment and GDP growth, which have already been revised twice. More downward revisions are undoubtedly coming.